IMF Programmes in Africa and the Implications for Creditworthiness

Monday, February 19, 2018 /08:25 AM / Fitch RatingsThe
increased involvement of the IMF in Africa over the last two years has
alleviated short-term liquidity pressures and contributed to the design and
implementation of adjustment policies to address macroeconomic imbalances.
However, the long-term impact of IMF programmes on creditworthiness is less
certain, as the sovereign ratings of countries under IMF arrangements have been
upgraded in some instances in the past and downgraded in others, Fitch Ratings
says.

The
confluence of shocks that has hit African countries in recent years has led to
a strong increase in the number of IMF arrangements in the region. The total
agreed amount of the IMF's outstanding arrangements with Sub-Saharan African
(SSA) countries rose nearly five-fold between end-2014 and end-2017. In 2017,
nine out of 21 Fitch-rated African sovereigns were under disbursing financial
arrangements with the IMF, up from only three in 2014.

IMF
involvement doubtlessly supports African sovereigns' creditworthiness during
programmes thanks to the Fund's role as a lender of last resort. The IMF helps
bridging financing gaps, reducing the risks of disorderly adjustment as many
countries faced pressures on liquidity, often from a weak position, with
growing debt ratios, low flexibility of exchange rate regimes and relatively
weak governance indicators.

The
Fund's financial assistance will only cover part of the fiscal financing needs
over the lifespan of the arrangements, but its interventions often crowd in
other creditors and also serve to avert capital outflows by domestic agents
through the so-called "catalytic effect".

In
the longer term, the impact of the IMF programmes on creditworthiness is less
clear-cut. The ability of IMF arrangements to support sovereign
creditworthiness ultimately depends on each country's characteristics,
including macroeconomic fundamentals, the quality of institutions and
governance, political set-up and, above all, the strength of commitment to the
implementation of the required adjustment.

IMF
intervention could lead to deterioration in the market's perception of
creditworthiness if the Fund assesses public debt to be unsustainable and
requires restructuring as a condition for its intervention.